US mortgage giants' crisis sparks fear for British banks

Emergency talks were being held this weekend to rescue America’s two biggest mortgage companies amid fears their collapse could hit UK markets.

The US government is facing a race against time to save the Wall Street-listed Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, known as Freddie Mac, before financial markets open tomorrow.

On Friday, regulators stepped in with a £4billion rescue of the Californian-based IndyMac Bancorp – the fifth US bank to collapse this year due to the mortgage crisis and the third-largest banking failure in the country’s history.

Rescue bid: The Freddie Mac headquarters in Virginia

Reports suggest the US government is considering taking over Fannie Mae and Freddie Mac, which between them own or guarantee half of the country’s $12trillion of mortgages, after their shares slumped on Friday amid concerns they were going bust.

Although privately owned and run by shareholders, the two banking giants are protected financially by the US government, which means they can call on it for emergency funding.

But if the US government persuades investment banks to help bail out Fannie Mae and Freddie Mac, it could mean there will be less cash to lend elsewhere. The shockwaves would be felt in the UK and across Europe, with the cost of mortgages rising and criteria for lending further tightened.

US Treasury Secretary Hank Paulson said the two companies, which specialise in the so-called sub-prime mortgage market that has been hit by huge numbers of homeowners defaulting on repayments, would not be allowed to collapse, but he stopped short of nationalisation and suggested the US government will pump cash into them via mortgage bonds.

In London, the Treasury and regulators, who have already had to take over Northern Rock after it almost went bust due to knock-on troubles from the US mortgage market, are anxiously watching events for fear they could further undermine weak UK banks.

Analyst Justin Urquhart Stewart, of Seven Investment Management, said the latest problems in the US could have a double whammy in the UK.

‘One is obviously market confidence, and that will have been hit by the collapse of IndyMac and concerns about the other mortgage companies,’ he said.

‘But probably more important is concern that US funds will have to support these banks, and that means there will be less cash to support elsewhere. There will be consequences.’

This weekend’s events will be a fresh shock to global financial markets. Analysts were hoping that the worst of the credit crunch, which has seen a massive reduction in lending to home buyers and businesses, was over.

But with the US housing market collapsing and repossessions rising, fears that they are facing huge losses meant that shares in Fannie Mae and Freddie Mac dropped in value by almost half at one point on Friday.

The two companies have become increasingly important to the ailing US housing market, as more and more banks which previously financed mortgages have stopped lending after racking up huge losses on sub-prime mortgage loans.

With London markets opening before Wall Street tomorrow, investors here will want some sign today from the US administration that it has averted another crisis in its mortgage market.

UK banks’ share prices have collapsed in value during the past year and many have gone cap in hand to shareholders to ask for money to prop up their businesses, with Bradford & Bingley due to ask investors to back a £400million fundraising rights issue this week.